Federalism, Regulatory Lags, and the Political Economy of Energy Production

University of Texas at Austin – McCombs School of Business – Department of Business, Government & Society; University of Texas at Austin - School of Law; University of Texas at Austin - Kay Bailey Hutchison Center for Energy, Law & Business

Date Written: March 6, 2012

Abstract

The production of natural gas from formerly inaccessible shale formations using hydraulic fracturing has expanded domestic energy supplies, lowered prices, and could stimulate the replacement of dirtier fossil fuels (coal and oil) with cleaner natural gas. At the same time, shale gas production has proven controversial, triggering intense opposition in some parts of the United States. State and local regulators have scrambled to adapt to the boom in natural gas production, raising the question of whether federal regulators should step in to supplant or supplement state regulation. This article takes a policy-neutral approach to the federalism questions at the center of that inquiry, asking which level of government ought to resolve these policy questions, rather than which level of government is likely to produce a particular favored policy outcome. Consequently, this analysis begins with four economic and political rationales that we typically use to justify federal regulation: (i) the presence of interstate “spillover” effects, (ii) the so-called “race to the bottom, (iii) the need for uniform standards for manufacturers, and (iv) the presence of an important national interest in developing and regulating an energy resource.

Applying each of these rationales to the regulation of hydraulic fracturing yields several important conclusions. First, while a few of the externalities of shale gas production cross state boundaries, most are experienced locally. Second, existing federal regulatory regimes offer ample authority to address those impacts that have interstate or national scope. Third, the race to the bottom rationale does not justify federal regulation of shale gas production because shale gas states are not competing for quantity- or time-limited capital investment. Fourth, given that the impacts of hydraulic fracturing are still under study and the subject of considerable ongoing debate, there is no overriding national interest supporting the creation of a comprehensive federal licensing/regulatory regime for shale gas production, at least not yet.

Spence, David B., Federalism, Regulatory Lags, and the Political Economy of Energy Production (March 6, 2012). University of Pennsylvania Law Review, 2012; U of Texas Law, Law and Econ Research Paper No. 222. Available at SSRN: https://ssrn.com/abstract=2017280